We maintain our forecast for the BOK to hike rate to 3.75% in 1Q23 and pause thereafter. External demand contraction and credit market stress will likely prompt the BOK to adopt a more cautious policy stance in 2023. Latest data showed that exports fell sharply by -16.7% YoY in Nov 1-20 (-5.5% in Oct). Pressure of inventory correction looks likely to intensify and continue for at least two quarters into 1H23. Meanwhile, credit spreads in the corporate bond and commercial paper markets continued to widen this month. More debt defaults could be expected in 2023, considering the lagging impact of financial condition tightening and corporate earnings decline.
That said, high inflation will likely make it difficult for the BOK to shift to cut rates in 2023. The latest CPI numbers remained sticky at 5.7% YoY. Inferred from the underlying momentum, it would take more than half a year for CPI numbers to ease notably below the 3% mark. At yesterday’s meeting, the BOK trimmed its 2023 inflation forecast by only 0.1ppt to 3.6%, despite lowering the GDP growth forecast by 0.4ppt to 1.7%.
In the near term, a volatile KRW also means that it will not be easy for the BOK to pivot earlier than the Fed. The KRW rebounded by almost 5% vs the USD in the first three weeks of Nov, largely thanks to market expectations for peaking Fed rates. South Korea’s trade balance has not improved during the same period and remained in a large deficit of USD4.4bn. In lack of a fundamental improvement, the KRW is likely to remain susceptible to the movement in short-term funds flows around the FOMC meetings in Dec22-1Q23.
Ma Tieying 馬鐵英, CFA
Senior Economist - Japan, South Korea, & Taiwan 經濟學家 - 日本, 南韓及台灣
[email protected]
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